BOJ Beat: Calibrating Kuroda’s Optimism: Easing Still Possible

BOJ Gov. Haruhiko Kuroda pauses during a news conference at the central bank’s headquarters in Tokyo on April 8.

Bloomberg News

Add Haruhiko Kuroda to the list of central bankers struggling these days to hone the right message to markets. The Bank of Japan governor sent the yen higher and the Nikkei Stock Average lower with a news conference Tuesday where his upbeat economic assessment was widely interpreted as an attempt to dampen market expectations of imminent new stimulus.

The sharp reaction appears to have caught the BOJ by surprise. And a close parsing of the public statements following this week’s policy meeting shows the central bank hadn’t intended to close the door on a fresh round of monetary easing this summer, should data show significant economic weakening in the wake of the April 1 tax hike.

While Mr. Kuroda did, indeed, tell reporters that “I am not contemplating any additional easing measures,” he made sure to add the usual qualifier, “at this point.” The official policy statement also included the usual promise to “examine … risks to economic activity and prices, and make adjustments as appropriate.”

The reason BOJ watchers dialed down their expectations for new action: Mr. Kuroda’s surprisingly rosy description of current economic conditions, and his strong optimism about hitting the central bank’s target of creating 2% inflation within two years. His use in particular of the word “kakushin” or “strong conviction” that the BOJ policies were working, set the tone for how his remarks were interpreted.

Mr. Kuroda’s rhetoric, and the reaction, highlight the complex task he faces in carrying out his policies — and for those trying to parse his remarks.

Mr. Kuroda is really speaking to two audiences. One is the Japanese public. In central bank parlance, one main “transmission mechanism” for his dramatic stimulus program is to foster “inflation expectations.” In lay terms: Mr. Kuroda is playing a bit of a circular confidence game. If Japanese consumers and business executives believe his policies are working, they will alter their behavior — raising wages, prices, spending — in ways that will make his polices more effective. For them, Mr. Kuroda needs to sound postive. That’s especially so now, as BOJ officials think private economists don’t fully appreciate the signs of progress they observe.

But then there’s the market audience. For them, Mr. Kuroda needs to send assurances that he’s ready to step in with more money if conditions weaken.

That can be a difficult juggle. If Mr. Kuroda signals further easing is imminent, he risks conveying to the Japanese public that he fears his current policies aren’t working. But if he sounds too confident, he risks spooking markets that he’s pulling away the safety net. That’s the stumble he appears to have made Tuesday, with comments that helped push the yen up more than 1% overnight against the dollar, and the Nikkei down 2% Wednesday.

(The yen tends to weaken when investors expect the BOJ to increase money supply, and to strengthen when expectations of such a move recede. A stronger yen generally pushes down Japanese stocks, as the currency move undermines the country’s exporters by pushing up their prices on global markets.)

The potential timing for the BOJ to decide on further stimulus remains unclear. Officials have said they need time to assess just how seriously the recent sales tax hike — to 8% from 5% — hurts consumption. They’re also closely watching inflation figures, to see whether the recent encouraging rise continues, as they forecast, or stalls out, as many private economists predict.

Mr. Kuroda’s market-moving comments follow similar experiences by Federal Reserve Chairwoman Janet Yellen and European Central Bank President Mario Draghi. After her first policy meeting running the U.S. central bank in late March, Ms. Yellen rattled markets by seeming to imply interest-rate increases could come as soon as this autumn. She prompted a rally two weeks later by altering her emphasis to suggest that tightening might take longer.

In early March, the ECB disappointed markets by declining to take new stimulus measures, despite growing fears that Europe could soon face Japan-style deflation. Then Mr. Draghi last week cheered investors by saying the ECB would consider new unconventional monetary easing, even though the central bank once again refrained from actually taking new action.

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